Stop loss: what it is and how to set it in crypto trading

What a stop loss is

It is an order that tells the exchange: «if the price gets here, close the position». In a long the stop sits below the entry, in a short above it. It does one thing only: it turns a possible, unlimited loss into a loss decided in advance.

Why you should always set one

Without a stop, a single bad trade can wipe out months of work. Cryptocurrencies can move 10-20% in a few hours; with leverage smaller moves are enough. The stop is the only defence that works even while you sleep, are at work or aren't looking at your phone.

There is also a psychological reason: decided before entering, the stop removes the temptation to «wait for it to come back», which is the most common way to turn a small loss into a big one.

Where to place it

Two criteria, to be used together:

• The chart structure: the stop goes where the idea turns out to be wrong. If you buy because the price held a support, the stop goes just below that support, not at a round number picked at random.
• Volatility: a stop too close gets hit by normal market noise, even when the idea was right. The more the coin moves, the wider the stop must be.

How much you risk: sizing the position

The stop alone is not enough: how much you buy matters too. The most widely used method starts from the maximum risk you accept on a trade, for example 1% of the account.

If the stop triggers, you lose about €10, plus costs. So a wide stop does not mean risking more: it means buying less.

A stop is not a guarantee

• Slippage: the stop usually becomes an order at the market price. In a fast crash it can be filled a little below the level you chose.
• Costs: exiting at the stop pays the higher fee, the one charged to those who take liquidity.
• Price gaps: in thin markets or at night the price can jump over the level without touching it.

The most common mistakes

• Moving it further away when the price gets close: it is the fastest way to lose a lot.
• Setting it too tight to «risk little»: it gets hit by the noise, and you lose often.
• Not setting it «because I'll keep an eye on it».

Types of stop order on a crypto exchange

• Stop market: when the price touches the level, the position closes immediately at the market price. It always exits, but the price can be a little worse.
• Stop limit: when the price touches the level, an order starts at a precise price. The price is the one you chose, but if the market falls too fast the order may remain unfilled, and the position open.
• Reference price: on perpetual contracts you can often choose whether the stop follows the last traded price or the «mark price», an average price that prevents the stop from triggering on a single abnormal spike.

To protect your capital, the stop market is the most prudent choice: better to exit a little worse than not to exit at all.

Stop and target together: the R:R ratio

The stop tells you how much you risk, the target how much you can gain. Their ratio is called R:R. With entry at 100, stop at 95 and target at 110, you risk 5 to make 10: an R:R of 2.

That is why a system that often closes at the stop can still make money: what counts is how much the trades that reach the target return, not only how many there are.

When the stop moves in your favour

The stop can instead move up (in a long) when the price goes the right way: first to the entry price, then to protect part of the profit. This is the trailing stop. At STA every card is born with a stop from the first minute, and an exit plan decides how to move it along while the position runs.

Frequently asked questions

This article is for information only and is not investment advice. Trading crypto-assets involves a high risk, including the total loss of the capital used. Numerical examples are for illustration.